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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A-2
(MARK ONE)
[X] AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to_______________
Commission file number: 0-20960
HAMILTON BANCORP INC.
(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0149935
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3750 N.W. 87th Avenue, Miami, Florida 33178
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 717-5500
Indicate by check [X] whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
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Item 1 and Item 2 of Part I and Part II Item 1 of the Registrant's Form 10-Q for
the quarterly period ended June 30, 2000 are hereby amended to read as follows:
ITEM 1
PART I. FINANCIAL INFORMATION
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
Unaudited
(In thousands)
As Restated, see As Restated, see
Note 4 Note 4
June 30, December 31,
2000 1999
---------------- ----------------
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS .............. $ 22,716 $ 21,710
FEDERAL FUNDS SOLD ..................................... 39,933 63,400
---------- ----------
Total cash and cash equivalents ..................... 62,649 85,110
INTEREST EARNING DEPOSITS WITH OTHER BANKS ............. 111,539 165,685
SECURITIES AVAILABLE FOR SALE .......................... 367,819 274,277
LOANS-NET .............................................. 1,056,907 1,081,256
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES .............. 42,998 27,767
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 1,616 5,835
PROPERTY AND EQUIPMENT-NET ............................. 4,892 5,209
ACCRUED INTEREST RECEIVABLE ............................ 19,043 19,111
GOODWILL-NET ........................................... 1,571 1,658
OTHER ASSETS ........................................... 32,571 34,779
---------- ----------
TOTAL .................................................. $1,701,605 $1,700,687
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS ............................................... $1,505,747 $1,535,606
TRUST PREFERRED SECURITIES ............................. 12,650 12,650
BANKERS ACCEPTANCES OUTSTANDING ........................ 42,998 27,767
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING ......... 1,616 5,835
OTHER LIABILITIES ...................................... 12,000 5,500
---------- ----------
Total liabilities ...................................... 1,575,011 1,587,358
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares
authorized, 10,081,147 shares issued and outstanding
at June 30, 2000 and December 31, 1999 .............. 101 101
Capital surplus ........................................ 60,702 60,708
Retained earnings ...................................... 59,838 47,302
Accumulated other comprehensive income ................. 5,953 5,218
---------- ----------
Total stockholders' equity ............................. 126,594 113,329
---------- ----------
TOTAL .................................................. $1,701,605 $1,700,687
========== ==========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data) (Unaudited)
As Restated, As Restated,
see Note 4 see Note 4
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans, including fees ..................... $ 27,331 $ 27,249 $ 56,937 $ 53,369
Deposits with other banks ................. 3,437 3,754 7,278 6,995
Investment securities ..................... 6,414 1,744 9,466 4,499
Federal funds sold ........................ 815 383 1,518 849
------------ ------------ ------------ ------------
Total ................................... 37,997 33,130 75,199 65,712
INTEREST EXPENSE:
Deposits .................................. 21,490 16,846 41,655 35,014
Trust preferred securities ................ 308 313 617 615
Federal funds purchased and other borrowing -- 39 1 144
------------ ------------ ------------ ------------
Total ........................................ 21,798 17,198 42,273 35,773
------------ ------------ ------------ ------------
NET INTEREST INCOME .......................... 16,199 15,932 32,926 29,939
PROVISION FOR CREDIT LOSSES .................. -- 1,746 750 2,646
PROVISION FOR TRANSFER RISK .................. 363 21,317 3,611 31,217
------------ ------------ ------------ ------------
NET INTEREST INCOME (LOSS) AFTER
PROVISIONS ................................. 15,836 (7,131) 28,565 (3,924)
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Trade finance fees and commissions ........ 2,067 2,425 4,284 5,155
Structuring and syndication fees .......... 2 594 2 840
Customer service fees ..................... 449 356 849 771
Net gain on sale of assets ................ 1,343 27 2,691 214
Other ..................................... 84 56 181 175
------------ ------------ ------------ ------------
Total ................................... 3,945 3,458 8,007 7,155
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Employee compensation and benefits ........ 3,656 3,167 6,619 6,511
Occupancy and equipment ................... 1,154 1,037 2,452 1,997
Other ..................................... 3,639 3,227 8,064 6,077
------------ ------------ ------------ ------------
Total ................................... 8,449 7,431 17,135 14,585
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES ................... 11,332 (11,104) 19,437 (11,354)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES .............................. 4,212 (4,136) 6,901 (4,232)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ............................ $ 7,120 $ (6,968) $ 12,536 $ (7,122)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC ........................................ $ 0.71 $ (0.69) $ 1.24 $ (0.71)
============ ============ ============ ============
DILUTED ...................................... $ 0.70 $ (0.69) $ 1.23 $ (0.71)
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING:
BASIC ........................................ 10,081,147 10,065,908 10,081,147 10,061,037
============ ============ ============ ============
DILUTED ...................................... 10,230,315 10,065,908 10,225,838 10,061,037
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) (Unaudited)
As Restated, As Restated,
see Note 4 see Note 4
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET INCOME (LOSS) ............................ $ 7,120 $ (6,968) $ 12,536 $ (7,122)
OTHER COMPREHENSIVE INCOME (LOSS), Net of tax:
Net change in unrealized loss on
securities available for sale during period 542 70 2,157 414
Less: Reclassification adjustment
for gains included in net income .......... (750) -- (1,422) --
Less: Reclassification adjustment
for write off of a foreign bank stock ...... -- -- -- (187)
-------- -------- -------- --------
Total ........................................ (208) 70 735 227
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) .................. $ 6,912 $ (6,898) $ 13,271 $ (6,895)
======== ======== ======== ========
See accompanying notes to consolidated financial statements
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
As Restated, see Note 4
(Dollars in thousands, except per share data) (Unaudited)
Accumulated
Common Stock Other Total
-------------------- Capital Retained Comprehensive Stockholders'
Shares Amount Surplus Earnings Income Equity
----------- ----------- ----------- ----------- ------------- -------------
Balance as of December 31, 1999 ........ 10,081,147 $ 101 $ 60,708 $ 47,302 $ 5,218 $ 113,329
Adjustment of tax liabilities due to
stock options exercised ............. (6) (6)
Net change in unrealized
gain on securities available for sale,
net of taxes ......................... 735 735
Net income for the six
months ended June 30, 2000 ........... 12,536 12,536
----------- ----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2000 ........... 10,081,147 $ 101 $ 60,702 $ 59,838 $ 5,953 $ 126,594
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
As Restated,
see Note 4
For Six Months Ended June 30,
-------------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ 12,536 $ (7,122)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization .................................. 749 665
Provision for credit losses .................................... 750 2,646
Provision for transfer risk .................................... 3,611 31,217
Deferred tax provision ......................................... 300 59
Write off of available for sale security ....................... -- 187
Net gain on sale of loans ...................................... -- (188)
Net gain on sale of other real estate owned .................... -- (26)
Net gain on sale of fixed assets ............................... (13) --
Net gain on sale of investments ................................ (2,378) --
Proceeds from the sale of bankers acceptances ..................... 6,510 14,397
Decrease (increase) in accrued interest receivable and
other assets ................................................... 2,666 (13,898)
Increase (decrease) in other liabilities .......................... 6,500 (1,550)
--------- ---------
Net cash provided by operating activities .................... 31,231 26,387
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest-earning deposits with other banks ............ 58,646 26,601
Purchase of securities available for sale ......................... (494,722) (401,679)
Purchase of securities held to maturity ........................... -- (10,760)
Proceeds from sales and maturities of securities available for sale 405,463 413,172
Proceeds from paydowns of securities held to maturity ............. -- 1,864
Proceeds from sale of loans ....................................... -- 11,148
Decrease (increase) in loans-net .................................. 7,128 (7,900)
Purchases of property and equipment-net ........................... (348) (581)
Proceeds from sale of other real estate owned ..................... -- 38
--------- ---------
Net cash (used in) provided by investing activities ............ (23,833) 31,903
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits .......................................... (29,859) (64,064)
Proceeds from trust preferred securities offering ................. -- 1,650
Payment of other borrowing ........................................ -- (6,116)
Net proceeds from exercise of common stock options ................ -- 188
--------- ---------
Net cash used in financing activities ............................. (29,859) (68,342)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ (22,461) (10,052)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ................. 85,110 111,790
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ....................... $ 62,649 $ 101,738
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period ................................... $ 32,535 $ 37,002
========= =========
Income taxes paid during the period ............................... $ 3,109 $ 7,569
========= =========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
NOTE 1: BASIS OF PRESENTATION
The consolidated statements of condition for Hamilton Bancorp Inc. and
Subsidiary (the "Company") as of June 30, 2000 and December 31, 1999, the
related consolidated statements of operations, comprehensive income (loss)
stockholders' equity and cash flows for the six months ended June 30, 2000 and
1999 included in the Form 10-Q have been prepared by the Company in conformity
with the instructions to Form 10-Q/A and Article 10 of Regulation S-X and,
therefore, do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
statements are unaudited except for the consolidated statement of condition as
of December 31, 1999.
The accounting policies followed for interim financial reporting are consistent
with the accounting policies set forth in Note 1 to the consolidated financial
statements appearing in the Company's Annual Report on Form 10-K/A-2 for the
year ended December 31, 1999 as filed with the Securities and Exchange
Commission.
NOTE 2: NET INCOME PER COMMON SHARE
Basic earnings per share is computed by dividing the Company's net income by the
weighted average number of shares outstanding during the period.
Diluted earnings per share is computed by dividing the Company's net income by
the weighted average number of shares outstanding and the dilutive impact of
potential common stock, primarily stock options. The dilutive impact of common
stock is determined by applying the treasury stock method.
NOTE 3: STOCK OPTIONS
On January 3, 2000, the Company granted 96,759 options at an exercise price of
$17.75. These options vest in thirds; twelve, eighteen and twenty-four months
after the grant if the individual is then employed with the Company.
NOTE 4: RESTATEMENT
Subsequent to the filing of the Company's amended quarterly report on Form
10-Q/A for the quarter ended June 30, 2000 and after extensive communications
with the staff of the Securities and Exchange Commission in connection with a
review by the staff of the Company's 1999 Annual Report on Form 10-K and 10-K/A
and the staff's comments thereon, management determined that the Company should
record in the three months ended June 30, 2000 and 1999, and the six months
ended June 30, 2000 and 1999, approximately $363,000, $21.3 million, $3.6
million and $31.2 million, respectively, of provisions for allocated transfer
risk reserves ("ATRR") on certain Ecuadorian exposure in its consolidated
financial statements. Additionally, the Company determined that it should
reclassify as of June 30, 2000 approximately $17.5 million and $22 million in
foreign interbank placements from interest bearing deposits with other banks,
which are subject to ATRR requirements, to loans. Accordingly, the Company has
restated the accompanying interim period consolidated financial statements from
amounts previously reported to record the ATRR and the reclassification of
certain interbank placements to loans. The ATRR are required for exposures with
respect to any country rated "value impaired" by the Interagency Country
Exposure Review Committee ("ICERC"). The ICERC recommends an appropriate
percentage level for ATRR, 90% in the case of Ecuador, for exposures rated
"value impaired". ATRR is a specific reserve which is triggered when an
obligation is more than 30 days past due and/or has been restructured to avoid
delinquency. For purposes of ATRR, a credit is considered to be current if it
would not be reported as "past due" or "non-accrual", as those terms are defined
in the instructions for schedule RC-N of the Call Report.
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The restated consolidated financial statements for the quarters ended June 30,
2000 and 1999 include amounts for the allowances for credit losses and ATRR
consistent with the amounts the Company recorded in its regulatory Call Reports.
The ATRR had been previously disclosed in Note 4 to the Company's consolidated
financial statements presented in the Company's June 30, 2000 quarterly report
on Form 10-Q/A as a reconciling item between stockholders' equity pursuant to
accounting principles generally accepted in the United States of America
("GAAP") and Tier 1 Capital determined under regulatory accounting principles.
The recording of ATRR for GAAP has no impact on regulatory capital and capital
ratios of the Company, since the ATRR has been deducted for such purposes since
initially being recorded in the Call Reports.
Through December 31, 1999 the Company recognized loan fees as received and
direct costs as incurred. Because loan fees are now more related to long-term
commitments rather than short-term trade financing, the Company has determined
that loan fees previously included in non-interest income, amounting to $2.9
million and $900,000 for the six and three months ended June 30, 2000,
respectively, and direct costs previously included in operating expenses
amounting to $449,000 and $128,000 for the six and three months ended June 30,
2000, respectively, were improperly recognized. The fees and costs should have
been deferred and recognized over the life of the related loan as interest
income. Consequently, the accompanying consolidated financial statements have
been restated to defer such fees and direct costs, and to recognize in interest
income the applicable amounts ($593,000 and $391,000, respectively) for the six
and three months ended June 30, 2000.
The following table summarizes the significant effects of the restatement:
As Previously
Reported As Restated
------------- ------------
AS OF JUNE, 2000
Interest-earning deposits with other banks $ 129,039 $ 111,539
Loans - net 1,077,589 1,056,907
Other assets 18,444 32,571
Other liabilities 12,049 12,000
Retained earnings 83,844 59,838
Total stockholders' equity 150,600 126,594
AS OF DECEMBER 31, 1999
Interest earning-deposits with other banks 187,685 165,685
Loans - net 1,091,976 1,081,256
Other assets 22,672 34,779
Other liabilities 5,544 5,500
Retained earnings 67,871 47,302
Total stockholders' equity 133,898 113,329
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As Previously
Reported As Restated
------------- ------------
FOR THE QUARTER ENDED JUNE 30, 2000
Interest income on loans 26,940 27,331
Provision for ATRR 363
Net interest income after provisions 15,808 15,836
Non-interest income 4,794 3,945
Other operating expenses 3,641 3,639
Income (loss) before taxes 12,024 11,332
Provision for taxes 4,468 4,212
Net income (loss) 7,556 7,120
Net income (loss) per common share
Basic 0.75 0.71
Diluted 0.74 0.70
FOR THE QUARTER ENDED JUNE 30, 1999
Interest income on loans 25,606 27,249
Provision for ATRR 21,317
Net interest income after provisions 12,543 (7,131)
Non-interest income 5,101 3,458
Other operating expenses 3,257 3,227
Income (loss) before taxes 10,183 (11,104)
Provision for taxes 3,750 (4,136)
Net income (loss) 6,433 (6,968)
Net income (loss) per common share
Basic 0.63 (0.69)
Diluted 0.63 (0.69)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Interest income on loans 56,345 56,937
Provision for ATRR 3,611
Net interest income after provisions 31,584 28,565
Non-interest income 10,899 8,007
Other operating expenses 8,071 8,041
Income (loss) before taxes 24,891 19,437
Provision for taxes 8,918 6,901
Net income (loss) 15,973 12,536
Net income (loss) per common share
Basic 1.58 1.24
Diluted 1.56 1.23
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Interest income on loans 51,136 53,369
Provision for ATRR 31,217
Net interest income after provisions 25,060 (3,924)
Non-interest income 9,389 7,155
Other operating expenses 6,122 6,077
Income (loss) before taxes 19,819 (11,354)
Provision for taxes 7,318 (4,232)
Net income (loss) 12,501 (7,122)
Net income (loss) per common share
Basic 1.24 0.71
Diluted 1.22 (0.71)
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NOTE 5: SUBSEQUENT EVENTS
REGULATORY DEVELOPMENTS SUBSEQUENT TO DECEMBER 31, 1999 - In February 2000, the
OCC initiated a formal administrative action against Hamilton Bank alleging
various unsafe and unsound practices discovered through an Examination of
Hamilton Bank as of August 23, 1999. On September 8, 2000, the OCC and Hamilton
Bank settled the administrative action by entering into a cease and desist order
by consent (the "September 8 Order"). The September 8 Order required Hamilton
Bank to comply with, among other things, certain accounting and capital
requirements and to make specified reports and filings. The September 8 Order
also required Hamilton Bank to maintain by September 30, 2000 Tier 1, Total and
leverage capital ratios of 10%, 12% and 7%, respectively, and to not pay
dividends without the prior written approval of the OCC. As of December 31,
2000, Hamilton Bank's Tier 1, Total and leverage capital ratios were 9.4%, 10.7%
and 6.5%, respectively, and as a result, the Bank was not in compliance with the
capital requirements of the September 8 Order.
On March 28, 2001, the OCC issued a Notice of Charges for Issuance of an Amended
Order to Cease and Desist (the "Notice of Charges") against Hamilton Bank. The
Notice of Charges alleged that Hamilton Bank has violated certain federal
banking laws and regulations by, among other things, (i) making loans in
violation of applicable lending limits; (ii) failing to file accurate Call
Reports; (iii) failing to file Suspicious Activity Reports ("SARs") with respect
to certain transactions; (iv) failing to provide a system of internal controls
to ensure ongoing compliance with the Bank Secrecy Act (the "BSA") and (v)
engaging in unsafe and unsound practices. The Notice of Charges also alleged
that Hamilton Bank has violated the September 8 Order by approving certain
overdrafts and making certain loans, and has not complied with certain other
provisions of the September 8 Order. Under the Notice of Charges, the OCC seeks
the issuance of an Amended Order to Cease and Desist (the "Proposed Amended
Order").
In connection with the issuance of the Notice of Charges, the OCC issued a
Temporary Order to Cease and Desist (the "Temporary Order") also on March 28,
2001. The Temporary Order requires Hamilton Bank to, among other things, (i)
comply with specified internal procedures in connection with the making of loans
and overdrafts and the placement of funds; (ii) develop, implement and adhere to
a written program acceptable to the OCC to ensure compliance with the BSA; (iii)
comply with specified procedures with respect to pouches received by the Bank
and existing foreign correspondent accounts; and (iv) develop, implement and
adhere to a written program acceptable to the OCC to ensure compliance with the
requirements to file SARs. In addition, the Temporary Order prohibits the Bank
from engaging in transactions with certain named persons and entities, or with
any parties who provide funding to such persons and entities.
The Proposed Amended Order contains provisions which are substantially the same
as those contained in the Temporary Order, as well as additional requirements.
The additional provisions contained in the Proposed Amended Order would also
require Hamilton Bank to, among other things, (i) achieve and maintain Tier 1,
Total and leverage capital ratios of 12%, 14% and 9%, respectively; (ii)
develop, implement and adhere to a three year capital plan acceptable to the
OCC; and (iii) obtain the approval of the OCC with respect to the appointment of
new directors and senior officers.
In addition, by letter dated March 28, 2001 (the "PCA Notice"), the OCC notified
the Company of its intent to "reclassify" the capital category of Hamilton Bank
to "undercapitalized" for purposes of Prompt Corrective Action ("PCA") based on
the OCC's determination that Hamilton Bank is engaging in unsafe and unsound
banking practices. Should the OCC be successful in reclassifying Hamilton Bank,
the OCC may require that Hamilton Bank comply with certain regulatory
requirements as if it were truly undercapitalized, even though under OCC
regulations, Hamilton Bank is classified as "adequately capitalized" because of
the existence of the September 8 Order.
The regulatory requirements the OCC may impose should Hamilton Bank be
reclassified as "undercapitalized" include (i) restrictions on capital
distributions, the payment of management fees, and/or asset growth, (ii)
requiring OCC monitoring of the Bank, and (iii) requiring that Hamilton Bank
obtain the OCC's prior approval with regards to acquisitions, branching and
engaging in new lines of business.
With respect to the above, Management of the Company believes the Company has
several means by which to achieve compliance with the prescribed capital
requirements of the September 8 Order. Such plans initially provide for reducing
the Bank's size through selected asset run-off; the sale of credit risk which
effectively decreases the Bank's regulatory capital requirements; targeted loan
sales, including the sale of the Ecuador portfolio subject to ATRR, and loan
participations to other banks; and shifting assets to liquid investments which
decreases regulatory capital requirements. Additionally, the Bank is working to
reach compliance with the other requirements of the September 8 Order.
But for the September 8 Order requiring the Bank to achieve and maintain higher
capital levels, the Bank's capital category as of December 31, 2000 would have
been "well capitalized," which required that Tier I, Total and leverage capital
ratios equal or exceed 6%, 10% and 5%, respectively.
Further, management of the Company does not believe that the ratios in the
Proposed Amended Order are appropriate or warranted and Management does not
intend to agree to such ratios voluntarily. In addition. Management believes the
timeframes for achieving such ratios set forth in the Proposed Amended Order are
commercially unreasonable.
However, assuming that the ratios were in fact lawfully imposed and that the
Bank was given a reasonable time to achieve such ratios, management believes and
anticipates that the Bank would continue to take the actions outlined above in
an orderly manner to meet required ratios.
On March 30, 2001, the Company was advised by the Federal Reserve Bank of
Atlanta (the "FRB"), its primary regulator, that the Company and Hamilton
Capital Trust should not pay any dividends, distributions or debt payments
without the prior approval of the FRB. The Company obtained approval from the
FRB to pay the dividend payable on April 2, 2001, amounting to approximately
$309,000, on the Series A Beneficial Unsecured
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Securities (the "Trust Preferred") issued by Hamilton Capital Trust I. There can
be no assurance that the FRB will approve any future payments. The Company will
not seek such approval and will not pay dividends on the Trust Preferred until
the Company's financial condition improves. Pursuant to the documents governing
the Trust Preferred, the Company and Hamilton Capital Trust I have the right,
under certain conditions, to defer dividend payments for up to 20 consecutive
quarters. Any payments deferred in this manner will continue to accumulate.
LEGAL DEVELOPMENTS SUBSEQUENT TO DECEMBER 31, 1999 - In May 2000, the judge
rendered a decision in the trial of various bankruptcy claims involving
Development Specialists, Inc., the liquidating trustee of the Model Imperial
Liquidating Trust. See the "Litigation" section of Note 12. The judge's decision
held that Hamilton Bank's proof of claim was subordinate to DSI's and granted
monetary bankruptcy preference damages against Hamilton Bank in the amount of
$2,448,148. Both Hamilton Bank and DSI appealed this decision. In December 2000
an agreement was reached in which Hamilton Bank made a net payment of
approximately $3.9 million to the Liquidating Trust to settle the case. In his
March 28, 2001 Order approving the settlement, the Judge specifically found that
the Court had not been presented with any evidence that Hamilton Bank had actual
knowledge of any transactions lacking in economic substance. The Judge also
found that Hamilton Bank was unaware of Model Imperial's deteriorating financial
condition and that Hamilton Bank was instead a victim of Model Imperial's
inappropriate transactions.
Six class action lawsuits were filed against the Company and certain officers in
the Federal District Court for the Southern District of Florida between January
12 and March 9, 2001. The class actions have been brought purportedly on behalf
of (i) all purchasers of common stock of the Company between April 21, 1998 and
December 22, 2000, or (ii) all purchasers of Hamilton Capital Trust I, series A
shares between December 23, 1998 and December 22, 2000. These cases seek to
pursue remedies under the Securities Exchange Act of 1934 or the Securities Act
of 1933. The cases have been consolidated as IN RE HAMILTON BANCORP, INC.
SECURITIES LITIGATION, Case No. 01-156 in the United States District Court for
the Southern District of Florida, and the lead plaintiffs appointed by the Court
are in the process of preparing a consolidated amended complaint. The discovery
process has not yet begun.
The allegations of the six actions are similar in all material respects.
Generally, the complaints allege that the defendants made false and misleading
statements and omissions between April 21, 1998 and December 22, 2000 with
respect to the Company's financial condition, net income, earnings per share,
internal controls, underwriting of transactions of loans, recording of
securities purchases and loan sale transactions, accounting for certain
financial transactions as independent transactions, the credit quality of the
Company's loan portfolio, credit loss reserves, inquiries and orders by the
Office of the Comptroller of the Currency, and reporting in accordance with GAAP
and related standards, in press releases, Forms 10-Q filed on May 14, 1998,
August 14, 1998, November 16, 1998, November 10, 1999, May 16, 2000, August 14,
2000, and Forms 10-K filed on March 31, 1999 and April 14, 2000.
EDIE ROLANDO PINTO LEMUS V. HAMILTON BANK, N.A., was filed in the Federal
District Court for the Southern District of Florida on September 12, 2000. The
complaint alleges counts for civil conspiracy, conversion, unjust enrichment,
money had and received, breach of fiduciary duty, constructive trust, breach of
contract and civil theft. Plaintiff alleges that he is a resident of Guatemala
and that he was a customer of the Bank through two other individuals, who he
also alleges were directors of the Bank. The plaintiff alleges that US$9,970,000
was stolen from him and deposited into "his" account at the Bank, which money
was "not returned to him" and thereby converted by the Bank. Plaintiff claims
that this action also constitutes civil theft under Florida statutes and that,
therefore, he is entitled to treble damages.
The plaintiff was a customer of the Bank for a short period of time (less than
three months) in 1995. The allegations in the complaint, however, do not appear
to bear any relation to that account.
The plaintiff had previously sued the other two persons in Guatemala making
virtually identical claims. The plaintiff lost that action. The Company is
seeking to have the case dismissed based upon forum non conveniens. On May 2,
2001, the motion was denied. Exceptions will be filed with the District Court
with a petition for certification for an appeal to the Eleventh Circuit Court of
Appeals in the alternative.
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12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Hamilton Bancorp Inc. ("Bancorp") is a bank holding company which conducts
operations principally through its 99.8 percent subsidiary, Hamilton Bank, N.A.
(the "Bank" and, collectively with Bancorp, the "Company"). The Bank is a
national bank which specializes in financing trade flows between domestic and
international companies on a global basis, with particular emphasis on trade
with and between South America, Central America, the Caribbean (collectively,
the "Region") and the United States. The Bank has a network of nine FDIC-insured
branches with eight Florida locations in Miami, Sarasota, Tampa, West Palm
Beach, Winter Haven and Weston, and a branch in San Juan, Puerto Rico.
RESTATEMENT
Subsequent to the filing of the Company's amended quarterly report on Form
10-Q/A for the quarter ended June 30, 2000 and after extensive communications
with the staff of the Securities and Exchange Commission in connection with a
review by the staff of the Company's 1999 Annual Report on Form 10-K and 10-K/A
and the staff's comments thereon, management determined that the Company should
record in the three months ended June 30, 2000 and 1999, and the six months
ended June 30, 2000 and 1999, approximately $363,000 million, $21.3 million,
$3.6 million and $31.2 million, respectively, of provisions for allocated
transfer risk reserves ("ATRR") on certain Ecuadorian exposure in its
consolidated financial statements. Additionally, the Company determined that it
should reclassify as of June 30, 2000 approximately $17 million and $22 million,
respectively, in foreign interbank placements from interest bearing deposits
with other banks, which are subject to ATRR requirements, to loans. Accordingly,
the Company has restated the accompanying interim period consolidated financial
statements from amounts previously reported to record the ATRR and the
reclassification of certain interbank placements to loans. The ATRR are required
for exposures with respect to any country rated "value impaired" by the
Interagency Country Exposure Review Committee ("ICERC"). The ICERC recommends an
appropriate percentage level for ATRR, 90% in the case of Ecuador, for exposures
rated "value impaired". ATRR is a specific reserve which is triggered when an
obligation is more than 30 days past due and/or has been restructured to avoid
delinquency. For purposes of ATRR, a credit is considered to be current if it
would not be reported as "past due" or "non-accrual", as those terms are defined
in the instructions for schedule RC-N of the Call Report.
The restated consolidated financial statements for the quarters ended June 30,
2000 and 1999 include amounts for the allowances for credit losses and ATRR
consistent with the amounts the Company recorded in its regulatory Call Reports.
The ATRR had been previously disclosed in Note 4 to the Company's consolidated
financial statements presented in the Company's June 30, 2000 quarterly report
on Form 10-QA as a reconciling item between stockholders' equity pursuant to
accounting principles generally accepted in the United States of America
("GAAP") and Tier 1 Capital determined under regulatory accounting principles.
The recording of ATRR for GAAP has no impact on regulatory capital and capital
ratios of the Company, since the ATRR has been deducted for such purposes since
initially being recorded in the Call Reports.
Through December 31, 1999 the Company recognized loan fees as received and
direct costs as incurred. Because loan fees are now more related to long-term
commitments rather than short-term trade financing. the Company has determined
that loan fees previously included in non-interest income, amounting to $2.9
million and $900,000 for the six and three months ended June 30, 2000,
respectively, and direct costs previously included in operating expenses
amounting to $449,000 and $128,000 for the six and three months ended June 30,
2000, respectively, were improperly recognized. The fees and costs should have
been deferred and recognized over the life of the related loan as interest
income. Consequently, the accompanying consolidated financial statements have
been restated to defer such fees and direct costs, and to recognize in interest
income the applicable amounts ($593,000 and $391,000, respectively) for the six
and three months ended June 30, 2000. See Note 4 to the Company's interim
consolidated financial statements for a summary of the significant effects of
the restatement.
11
13
The Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and six months ended June 30, 2000 presented herein
have been adjusted to reflect the restatement described above.
FINANCIAL CONDITION - JUNE 30, 2000 VS. DECEMBER 31, 1999
Total consolidated assets remained relatively the same at $1.70 billion at June
30, 2000 although there were changes within the asset categories. Cash and cash
equivalents decreased by $22.5 million or 26.4 percent. Securities available for
sale increased by 34.1 percent to $367.8 million of which approximately $163.2
million represents additional liquidity.
CASH, DEMAND DEPOSITS WITH OTHER BANKS AND FEDERAL FUNDS SOLD
Cash, demand deposits with other banks and federal funds sold are considered
cash and cash equivalents. Balances of these items fluctuate daily depending on
many factors which include or relate to the particular banks that are clearing
funds, loan payoffs, deposit gathering and reserve requirements. Cash, demand
deposits with other banks and federal funds sold were $62.6 million at June 30,
2000 compared to $85.1 million at December 31, 1999.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND INVESTMENT SECURITIES
Interest-earning deposits with other banks decreased to $111.5 million at June
30, 2000 from $165.7 million at December 31, 1999. These deposits are placed
with correspondent banks in the Region, generally on a short-term basis (less
than 365 days), to increase yields and enhance relationships with the
correspondent banks. The level of such deposits has diminished as the exposure
in the Region has decreased during the six months ended June 30, 2000. The
short-term nature of these deposits allows the Company the flexibility to later
redeploy assets into higher yielding loans.
Investment securities increased to $367.8 million at June 30, 2000 from $274.3
million at December 31, 1999. The increase has been primarily in U.S. government
agency securities and to a lesser extent U. S. government mortgage backed
securities. The government agency securities are short term in nature and allow
the Company the flexibility of liquidity and the ability to convert these assets
into higher yielding loans as these become accessible. The mortgage backed
securities diversify the Company's portfolio, are eligible collateral for
securing public funds and qualify as a Community Reinvestment Act investment.
LOANS
The Company's gross loan portfolio decreased by $20.5 million, during the first
six months of 2000 in relation to the year ended December 31, 1999. This
decrease was primarily in loans to banks and other financial institutions -
foreign which decreased by $27.8 million. Details on the loans by type are shown
in the table below. At June 30, 2000 approximately 42.9 percent of the Company's
portfolio consisted of loans to domestic borrowers and 57.1 percent of the
Company's portfolio consisted of loans to foreign borrowers. The Company's loan
portfolio is relatively short-term, as approximately 76.2 and 83.3 percent of
loans at June 30, 2000 were short-term loans with average maturities of less
than 180 and less than 365 days, respectively.
The following table sets forth the loans by type in the Company's loan portfolio
at the dates indicated.
LOANS BY TYPE
(in thousands)
June 30, 2000 December 31, 1999
-------------- -----------------
Domestic:
Commercial (1)............................. $ 402,845 $ 394,841
Acceptances discounted..................... 74,723 59,040
Residential mortgages...................... 2,057 2,140
-------------- --------------
Subtotal Domestic.......................... 479,625 456,021
-------------- --------------
Foreign:
Banks and other financial institutions..... 218,359 246,155
Commercial and industrial (1).............. 337,630 338,411
Acceptances discounted..................... 39,763 59,256
Government and official institutions....... 42,319 38,358
-------------- --------------
Subtotal Foreign........................... 638,071 682,180
-------------- --------------
Total Loans................................ $ 1,117,696 $ 1,138,201
============== ==============
(1) Includes pre-export financing, warehouse receipts and refinancing of
letter of credits.
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14
The following tables largely reflect both the Company's growth and
diversification in financing trade flows between the United States and the
Region in terms of loans by country and cross-border outstandings by country.
The aggregate amount of the Company's crossborder outstandings by primary credit
risk include cash and demand deposits with other banks, interest earning
deposits with other banks, investment securities, due from customers on bankers
acceptances, due from customers on deferred payment letters of credit and loans,
net of related deposits. Exposure levels in any given country at the end of each
period may be impacted by the flow of trade between the United States (and to a
large extent Florida) and the given countries, as well as the price of the
underlying goods or commodities being financed.
At June 30, 2000 approximately 28.1 percent in principal amount of the Company's
loans were outstanding to borrowers in four countries other than the United
States: Panama (12.0 percent), Guatemala (6.1 percent), Ecuador (5.2 percent)
and El Salvador (4.8 percent).
Panama loan exposure continues to be over 10 percent of loans and has increased
to 12.0 percent of total loans at June 30, 2000. The bulk of the credit
relationships in Panama are related to financing short-term trade transactions
with companies operating out of the Colon Free Zone. The latter represents the
second largest free trading zone in the world after Hong Kong. The companies
operate largely as importers and exporters of consumer goods such as electronic
goods and clothing.
LOANS BY COUNTRY
(Dollars in thousands)
June 30, 2000 December 31, 1999
------------------------------- -----------------------------
Percent of Percent of
Country Amount Total Loans Amount Total Loans
---------- ----------- ---------- -----------
United States $ 479,625 42.9% $ 456,021 40.1%
Argentina 22,910 2.0% 35,494 3.1%
Brazil 42,178 3.8% 49,214 4.3%
British West Indies (1) -- 22,082 1.9%
Colombia 24,722 2.2% 28,437 2.5%
Dominican Republic 38,740 3.5% 41,604 3.7%
Ecuador 58,412 5.2% 65,622 5.8%
El Salvador 53,383 4.8% 45,847 4.0%
Guatemala 67,897 6.1% 66,531 5.8%
Honduras 39,079 3.5% 42,352 3.7%
Jamaica 39,428 3.5% 28,628 2.5%
Panama 134,364 12.0% 127,419 11.2%
Peru 22,116 2.0% 29,648 2.6%
Venezuela 16,804 1.5% 17,842 1.6%
Other (2) 78,038 7.0% 81,460 7.2%
---------- ----- ---------- -----
Total $1,117,696 100.0% $1,138,201 100.0%
========== ===== ========== =====
(1) These countries had loans in periods presented which did not exceed 1
percent of total loans.
(2) Other consists of loans to borrowers in countries in which loans did
not exceed 1 percent of total loans.
At June 30, 2000 approximately 26.3 percent of total assets were cross-border
outstandings to borrowers in five countries other than the United States: Brazil
(7.2 percent), Panama (7.1 percent), Guatemala (4.5 percent), Ecuador (4.2
percent) and Argentina (3.3 percent).
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15
TOTAL CROSS-BORDER OUTSTANDINGS BY COUNTRY (Dollars in millions) (3)
June 30, 2000 December 31, 1999
-------------------------- -------------------------
% of Total % of Total
Amount Assets Amount Assets
------ ---------- ------ ----------
Argentina ........ $ 57 3.3% $ 113 6.6%
Bahamas .......... 17 1.0% 21 1.2%
Bolivia (1) ...... -- -- 18 1.0%
Brazil ........... 124 7.2% 173 10.1%
Colombia ......... 45 2.6% 48 2.8%
Dominican Republic 44 2.5% 55 3.2%
Ecuador .......... 72 4.2% 78 4.5%
El Salvador ...... 52 3.0% 44 2.6%
Guatemala ........ 78 4.5% 68 4.0%
Honduras ......... 38 2.2% 43 2.5%
Jamaica .......... 44 2.5% 35 2.0%
Mexico ........... 13 0.8% 20 1.2%
Panama ........... 122 7.1% 116 6.7%
Peru ............. 30 1.7% 42 2.4%
Suriname ......... 36 2.1% 32 1.9%
United Kingdom ... 15 0.9% 15 0.9%
Venezuela ........ 19 1.1% 17 1.0%
Other (2) ........ 77 4.5% 75 4.4%
------ ---- ------ ----
Total ............ $ 883 51.2% $1,013 59.0%
====== ==== ====== ====
(1) These countries had outstandings in periods presented which did not
exceed 1 percent of total assets.
(2) Other consists of cross-border outstandings to countries in which such
cross-border outstandings did not exceed 0.75 percent of the Company's
total assets at any of the dates shown.
(3) Cross-border outstandings could be less than loans by country since
cross-border outstandings may be netted against legally enforceable,
written guarantees of principal or interest by domestic or other
non-local third parties. In addition, balances of any tangible, liquid
collateral may also be netted against cross-border outstandings of a
country if they are held and realizable by the lender outside of the
borrower's country.
CONTINGENCIES - COMMERCIAL LETTERS OF CREDIT
(in thousands)
The following table sets forth the total volume and average monthly volume of
the Company's export and import letters of credit for each of the periods
indicated. As shown by the table, the volume of commercial letters of credit
increased by 21.7 percent to $280.4 million for the six months ended June 30,
2000 when compared to the same period in 1999. This increase is due to greater
domestic import activities, which increased by 30.0 percent, and to a lesser
extent, export activities, which increased by 11.7 percent.
Six Months Ended June 30,
---------------------------------- Year Ended
2000 1999 December 31, 1999
---------- ---------- ----------------------
Average Average Average
Total Monthly Total Monthly Total Monthly
Volume Volume Volume Volume Volume Volume
---------- --------- ---------- --------- ---------- ---------
Export Letters of Credit (1)..................... $ 116,522 $ 19,420 $ 104,352 $ 17,392 $ 227,904 $ 18,992
Import Letters of Credit (1)..................... 163,862 27,310 126,031 21,005 296,943 24,745
---------- --------- ---------- --------- ---------- ---------
Total............................................ $ 280,384 $ 46,730 $ 230,383 $ 38,397 $ 524,847 $ 43,737
========== ========= ========== ========= ========== =========
(1) Represents certain contingent liabilities not reflected on the
Company's balance sheet.
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16
The following table sets forth the distribution of the Company's contingent
liabilities by country of the applicant and issuing bank for import and export
letters of credit, respectively. As shown by the table, contingent liabilities
decreased by 1.5 percent from December 31, 1999 to June 30, 2000. Individual
fluctuations reflect relative changes in the flow of trade or instruments used
in financing such trade as well as the cyclical nature of certain trade
activities.
CONTINGENT LIABILITIES (1)
(in thousands)
June 30, 2000 Dec 31, 1999
------------- ------------
Aruba (2).............................................................................. $ -- $ 3,720
Costa Rica(2).......................................................................... -- 9,893
Dominican Republic..................................................................... 5,879 4,707
El Salvador............................................................................ 2,172 2,734
Guatemala.............................................................................. 6,235 9,475
Guyana................................................................................. 3,155 4,165
Haiti(2)............................................................................... -- 5,705
Honduras............................................................................... 4,097 4,174
Jamaica(2)............................................................................. 9,703 --
Panama................................................................................. 7,173 14,242
Paraguay(2)............................................................................ 4,317 --
Peru................................................................................... 3,431 3,573
Suriname............................................................................... 2,282 5,677
United States.......................................................................... 95,895 74,643
Venezuela(2)........................................................................... -- 2,593
Other(3)............................................................................... 4,841 6,143
------------ -----------
Total.................................................................................. $ 149,180 $ 151,444
============ ===========
(1) Includes export and import letters of credit, standby letters of credit
and letters of indemnity.
(2) These countries had contingencies which represented less than 1 percent
of the Company's total contingencies at periods presented in the above
dates.
(3) Other includes those countries in which contingencies represent less
than 1 percent of the Company's total contingencies at each of the
above dates.
ALLOWANCE FOR CREDIT LOSSES AND ALLOCATED TRANSFER RISK RESERVES
Allowances are established against the loan portfolio to provide for
credit and transfer risk. Transfer risk, defined by Federal banking regulators
as allocated transfer risk reserves ("ATRR") is associated with certain portions
of the Company's foreign exposure. The level of ATRR is determined by Federal
banking regulators and represents a minimum allowance required for the related
foreign exposure. The Company assesses the probable losses associated with that
portion of the loan portfolio that is subject to the ATRR, and if an additional
allowance is needed it is included in the allowance for credit losses.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment of the
level of allowance adequate to provide for probable losses inherent in the loan
portfolio as of the balance sheet date. The allowance takes into consideration
the following factors: (i) the economic conditions in those countries in the
Region in which the Company conducts trade finance activities; (ii) the credit
condition of its customers and correspondent banks, as well as the underlying
collateral, if any; (iii) historical loss experience; (iv) the average maturity
of its loan portfolio and (v) political and economic conditions in certain
countries of the Region.
On a quarterly basis, the Bank assesses the overall adequacy of the
allowance for credit losses, utilizing a disciplined and systematic approach
which includes the application of a specific allowance for identified impaired
loans, an allocated formula allowance for identified graded loans and all other
portfolio segments, and an unallocated allowance.
15
17
Specific allowances are established for impaired loans in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan." A loan is considered impaired when, based
on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due
according to the original contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Impairment is
measured on a loan by loan basis for non-homogenous loans by either the present
value of expected future cash flows discounted at the loans effective interest
rate, the loans obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
The allocated formula allowance is calculated by applying loss factors
to outstanding loans based on the internal risk grade of such loans. Changes in
risk grades of both performing and nonperforming loans affect the amount of the
allocated formula allowance. Loss factors are based on our historical loss
experience or on loss percentages used by our regulators for similarly graded
loans and may be adjusted upward for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are described as follows:
o Problem-graded loan loss factors are derived from loss percentages
required by our banking regulators for similarly graded loans. Loss
factors of 2 to 5%, 15% and 50% are applied to the outstanding balance of
loans internally classified as special mention, substandard and doubtful,
respectively.
o Pass-graded loan loss factors are based on net charge-offs (i.e.,
charge-off less recoveries) to average loans. The Company's current
methodologies incorporate prior year net charge-offs, three year average
net charge-offs and five year average net charge-offs and are used to
compute a range of probable losses.
The unallocated allowance is established based upon management's
evaluation of various conditions, the effects of which are not directly measured
in the determination of the specific and allocated allowances. The evaluation of
the inherent loss with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the unallocated
allowance include, but are not limited to, the following factors, which existed
at the balance sheet date:
o General economic and business conditions affecting the Region;
o Loan volumes and concentrations;
o Credit quality trends;
o Collateral values;
o Bank regulatory examination results; and
o Findings of our internal credit examiners
Management reviews these conditions quarterly with our senior credit
officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit as of the evaluation date, management's
estimate of the effect of such condition may be reflected as a specific
allowance applicable to such credit. Where any of these conditions is not
evidenced by a specifically identifiable problem credit or reflected in the
formula allowance as of the evaluation date, management's evaluation of the
probable loss related to such condition is reflected in the unallocated
allowance.
Our methodologies include several features that are intended to reduce
the difference between estimated and actual losses. The loss factors that are
used to establish the allowance for pass-graded loans is designed to be
self-correcting by taking into account changes in loan classification and
permitting adjustments based on management's judgment of significant qualitative
factors as of the evaluation date. Similarly, by basing the pass-graded loan
loss factors on loss experience over the prior year and the last three or five
years, the methodology is designed to take our recent loss experience into
account. The Bank generally operates a commercial banking business, which does
not include significant amounts of pooled loans or loans that are homogeneous in
nature
16
18
such as residential mortgages or consumer installment loans (these represent
0.2% of gross loans at both June 30, 2000 and December 31, 1999).
ALLOCATED TRANSFER RISK RESERVES
Management determines the level of ATRR utilizing the guidelines of the
Interagency Country Exposure Review Committee ("ICERC"). The ICERC was formed by
the OCC, FDIC and FRB to ensure consistent treatment of the transfer risk
associated with banks' foreign exposures. Transfer risk is defined as the
possibility that an asset cannot be serviced in the currency of payment because
of a lack of, or restraints on the availability of, needed foreign exchange in
the country of the obligor. The ICERC guidelines state that transfer risk is one
facet of the more broadly defined concept of country risk. Country risk, which
has an overarching effect on the realization of an institution's foreign assets,
encompasses all of the uncertainties arising from the economic, social, and
political conditions in a country. The ATRR ratings assigned by ICERC focus
narrowly on the availability of foreign exchange to service a country's foreign
debt, and represent the minimum required reserves for exposures that are subject
to the ATRR provisions. ICERC meets several times a year to assess transfer risk
in various countries, based largely on the level of aggregate exposure held by
U.S. banks. Based on these assessments, ratings are established for individual
countries. In establishing the ratings, ICERC does not consider the credit risk
associated with individual counter parties in a country.
A country may be rated "value impaired" based on ICERC's assessment of
transfer risk. A value impaired country is one which has protracted arrearages
in debt service, as indicated by one or more of the following: i) the country
has not fully paid its interest in six months, ii) the country has not complied
with International Monetary Fund programs and there is no immediate prospect for
compliance, iii) the country has not met rescheduling terms for more than one
year, iv) the country shows no definite prospects for an orderly restoration of
debt service in the near future. Once a country has been rated value impaired,
the requirements for ATRR are applicable for exposures to borrowers in that
country. Generally, any obligation of a borrower in such a country will be
subject to ATRR if the obligation becomes more than 30 days past due, or if it
is restructured at any time to avoid delinquency. Once the ATRR is applicable,
it can only be eliminated by charge-off of the asset, collection of the asset,
or removal of the ATRR requirement by ICERC. Changes in the level of ATRR
recorded by the Company, including increases resulting from higher requirements
or applicable loans, and decreases resulting from lower requirements or
collections of loans, are charged or credited to current income. Charge-offs of
loans subject to ATRR requirements are charged against the ATRR to the extent of
the ATRR applicable to that loan, and any excess is charged to the general
allowance for credit losses.
Currently, Ecuador is rated value impaired by ICERC, with a 90% ATTR
requirement for applicable exposures. At June 30, 2000 and December 31, 1999,
the Company had aggregate exposure to borrowers located in Ecuador of
approximately $72 million and $78 million, respectively, including loans of $58
million at June 30, 2000 and $66 million at December 31, 1999. During 1999, as a
result of economic deterioration in Ecuador, the Company restructured exposures
with certain borrowers to improve collectibility prospects. Primarily as a
result of these restructurings, approximately $36.4 million of the Company's
Ecuadorian exposure at December 31, 1999 was subject to the 90% ATRR
requirement. Accordingly, an ATRR of $32.7 million was established during 1999.
During the first six months of 2000, as a result of temporary delinquencies, new
loans became subject to ATRR, resulting in an additional provision of $3.6
million, including $363,000 in the second quarter. At June 30, 2000,
approximately 96% of the Company's Ecuadorian exposures were in compliance with
their contractual terms.
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19
The following table sets forth the composition of the allowance for
credit losses and ATRR as of June 30, 2000 and December 31, 1999:
June 30, 2000 December 31, 1999
------------- -----------------
Allocated:
Specific (Impaired loans) $ 12,263 $ 6,173
Formula 6,784 12,033
Unallocated 1,180 3,205
---------- ----------
Total allowance for credit losses 20,227 21,411
Allocated transfer risk reserve 36,331 32,720
---------- ----------
Total allowance and reserves $ 56,558 $ 54,131
========== ==========
The total allowance for credit losses was substantially unchanged as of June 30,
2000 compared to December 31, 1999. As a result of an increase in specific
problem loans in connection with the increase in nonaccrual loans, the specific
portion of the allowance for credit losses was increased as of June 30, 2000
compared to December 31, 1999.
Determining the appropriate level of the allowance for credit losses requires
management's judgment, including application of the factors described above to
assumptions and estimates made in the context of changing political and economic
conditions in many of the countries of the Region. Accordingly, there can be no
assurance that the Company's current allowance for credit losses will prove to
be adequate in light of future events and developments.
18
20
The following table provides certain information with respect to the Company's
allowance for credit losses and ATRR activity for the periods shown.
CREDIT LOSS AND TRANSFER RISK EXPERIENCE
(in thousands)
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
Balance of allowance for credit losses at beginning of period.................. $ 21,411 $ 12,794
Charge-offs:
Domestic:
Commercial.................................................................. (87) (3,299)
Acceptances................................................................. (297) --
Installment................................................................. -- (5)
--------------- --------------
Total Domestic................................................................. (384) (3,304)
--------------- --------------
Foreign:
Banks and other financial institutions...................................... (200) (2,330)
Commercial and industrial................................................... (1,393) (6,216)
--------------- --------------
Total Foreign.................................................................. (1,593) (8,546)
--------------- --------------
Total charge-offs.............................................................. (1,977) (11,850)
--------------- --------------
Recoveries:
Domestic:
Commercial.................................................................. 2 4
Foreign:
Banks and other financial institutions...................................... 41 163
--------------- --------------
Total recoveries............................................................... 43 167
--------------- --------------
Net (charge-offs) recoveries................................................... (1,934) (11,683)
Provision for credit losses.................................................... 750 20,300
--------------- --------------
Balance of allowance for credit losses at end of the period.................... $ 20,227 $ 21,411
=============== ==============
ATRR at beginning of period.................................................... $ 32,720 -
Provision for transfer risk.................................................... 3,611 32,720
--------------- --------------
ATRR at end of period.......................................................... $ 36,331 32,720
=============== ==============
Allowance for credit losses and ATRR at end of period.......................... $ 56,558 $ 54,131
=============== ==============
Average loans.................................................................. $ 1,182,161 $ 1,181,865
Total loans.................................................................... $ 1,117,696 $ 1,138,201
Net charge-offs to average loans............................................... 0.16% 1.00%
Allowance for credit losses to total loans..................................... 1.81% 1.88%
Allowance for credit losses and ATRR to total loans............................ 5.06% 4.76%
19
21
The following tables set forth an analysis of the allocation of the allowance
for credit losses by category of loans and the allowance for credit losses
allocated to foreign loans. The allowance is established to cover potential
losses inherent in the portfolio as a whole or is available to cover potential
losses on any of the Company's loans. Because of the decrease in foreign loans,
the allowance allocated to foreign loans was also reduced which reflects a
negative provision for credit losses attributable to foreign loans. The level of
the allowance allocated to foreign loans was also influenced by the
strengthening of the Latin American economies, the collateral composition of the
non-performing loans, the reduction of in Ecuadorian loans and the low loan
growth during the period.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES AND ALLOCATED TRANSFER RISK RESERVE
(IN THOUSANDS)
As of As of
June 30, 2000 December 31, 1999
--------------- -----------------
Allocation of the allowance by category of loans:
Domestic:
Commercial.................................................................. $ 9,047 $ 3,199
Acceptances................................................................. 299 269
Residential................................................................. 10 10
--------------- --------------
Total domestic........................................................... 9,356 3,478
--------------- --------------
Foreign Non-ATRR:
Government and official institutions........................................ 169 1,496
Banks and other financial institutions...................................... 1,105 5,152
Commercial and industrial................................................... 9,438 11,015
Acceptances discounted...................................................... 159 270
--------------- --------------
Total foreign non-ATRR................................................... 10,871 17,933
--------------- --------------
Foreign ATRR:
Government and official institutions........................................ 7,852 6,035
Banks and other financial institutions...................................... 20,277 19,800
Commercial and industrial................................................... 8,202 6,885
--------------- --------------
Total foreign ATRR....................................................... 36,331 32,720
--------------- --------------
Total foreign............................................................ 47,202 50,653
--------------- --------------
Total ...................................................................... $ 56,558 $ 54,131
=============== ==============
Percent of loans in each category to total loans:
Domestic:
Commercial.................................................................. 36.0% 35.4%
Acceptances................................................................. 6.7% 5.3%
Residential................................................................. 0.2% 0.2%
---------------- --------------
Total domestic........................................................... 42.9% 40.9%
---------------- --------------
Foreign Non-ATRR:
Banks and other financial institutions...................................... 17.5% 18.1%
Commercial and industrial................................................... 29.5% 29.6%
Acceptances discounted...................................................... 3.6% 5.3%
Government and official Institutions........................................ 3.1% 2.8%
---------------- --------------
Total foreign non-ATRR................................................... 53.7% 55.8%
---------------- --------------
Foreign ATRR:
Government and official institutions........................................ 0.8% 0.6%
Banks and other financial institutions...................................... 2.0% 2.0%
Commercial and industrial................................................... 0.6% 0.7%
---------------- --------------
Total foreign ATRR....................................................... 3.4% 3.3%
---------------- --------------
Total foreign............................................................ 57.1% 59.1%
---------------- --------------
Total ...................................................................... 100.0% 100.0%
================ ============
20
22
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES AND ALLOCATED TRANSFER RISK RESERVES TO
FOREIGN LOANS
(In thousands)
June 30, 2000 December 31, 1999
------------- -----------------
Balance, beginning of year..................................................... $ 50,653 $ 11,379
Provision for credit losses.................................................... (5,510) 14,937
Net charge-offs................................................................ (1,552) (8,383)
Provision for transfer risk.................................................... 3,611 32,720
------------- ---------------
Balance, end of period......................................................... $ 47,202 $ 50,653
============= ===============
Composition at end of period:
Allowance for credit losses.................................................... $ 10,871 $ 17,933
ATRR........................................................................... 36,331 32,720
------------- ---------------
Total foreign allowances....................................................... $ 47,202 $ 50,653
============= ===============
The Company does not have a rigid charge-off policy but instead charges off
loans on a case-by-case basis as determined by management and approved by the
Board of Directors. In some instances, loans may remain in the nonaccrual
category for a period of time during which the borrower and the Company
negotiate restructured repayment terms.
The Company attributes its favorable asset quality to the short-term nature of
its loan portfolio, the composition of its borrower base, the importance that
borrowers in the Region attach to maintaining their continuing access to
financing for foreign trade and the Company's loan underwriting policies.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan. Under these standards, individually identified impaired
loans are measured based on the present value of payments expected to be
received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices or, for
loans that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. The Company evaluates commercial
loans individually for impairment, while groups of smaller-balance homogeneous
loans (generally residential mortgage and installment loans) are collectively
evaluated for impairment.
The following table sets forth information regarding the Company's nonperforming
loans at the dates indicated.
NONPERFORMING LOANS
(In thousands)
June 30, 2000 December 31, 1999
------------- -----------------
Domestic:
Non accrual................................................................ $ 16,383 $ 6,995
Past due over 90 days and accruing......................................... 1,851 --
------------- ---------------
Total domestic nonperforming loans
18,234 6,995
------------- ---------------
Foreign:
Non accrual................................................................ 16,608 9,588
Past due over 90 days and accruing......................................... -- 1,992
------------- ---------------
Total foreign nonperforming loans....................................... 16,608 11,580
------------- ---------------
Total nonperforming loans...................................................... $ 34,842 $ 18,575
============= ===============
Total nonperforming loans to total loans....................................... 3.12% 1.66%
Total nonperforming assets to total assets..................................... 2.29% 1.08%
Nonperforming loans increased from $18.6 million at December 31, 1999 to $34.8
million at June 30, 2000. This was due to an increase in domestic nonperforming
loans from $7.0 million at December 31, 1999 to $18.2 million at June 30, 2000.
The increase was substantially related to one credit relationship for the
approximate amount of $16 million involving a domestic customer in the
import/export business. This amount was offset by a decrease of approximately
$6.4 million due to a reclassification of a domestic loan to a foreign loan
status due to the underlying security and primary source of repayment for the
obligation. Total nonperforming loans was also affected by an increase in
foreign nonperforming loans from $11.6 million to $16.6 million for the periods
ended December 31, 1999 and June 30, 2000, respectively. This increase was due
to the aforementioned reclassification of a domestic loan to a foreign loan.
This amount represented approximately $6.4 million that was offset by foreign
charge-offs of approximately $1.6 million.
21
23
At June 30, 2000, the Company had $4.7 million in nonperforming investment
securities and other assets compared to no nonperforming investment securities
and other assets at December 31, 1999. Nonperforming investment securities at
June 30, 2000 totaled $1.2 million and consisted of a foreign debt security
available for sale. The value of this security was determined by applying SFAS
115 and a write-off was not deemed necessary.
DUE FROM CUSTOMERS ON BANKERS' ACCEPTANCES AND DEFERRED PAYMENT LETTERS OF
CREDIT.
Due from customers on bankers' acceptances and deferred payment letters of
credit were $43.0 million and $1.6 million, respectively, at June 30, 2000
compared to $27.8 million and $5.8 million, respectively, at December 31, 1999.
These assets represent a customer's liability to the Company while the Company's
corresponding liability to third parties is reflected on the balance sheet as
"Bankers Acceptances Outstanding" and "Deferred Payment Letters of Credit
Outstanding".
DEPOSITS
The primary sources of the Company's domestic time deposits are its eight Bank
branches located in Florida and one in Puerto Rico. In pricing its deposits, the
Company analyzes the market carefully, attempting to price its deposits
competitively with the other financial institutions in the area.
Total deposits were $1.505 billion at June 30, 2000 compared to $1.536 billion
at December 31, 1999. The decrease in deposits during the six month period was
largely in certificates of deposits under $100,000 which decreased by $75.9
million . This decrease was offset by increases in overnight funds and
certificates of deposit over $100,000 of $37.6 and $16.0 million, respectively.
The following table indicates the maturities and amounts of certificates of
deposit and other time deposits issued in denominations of $100,000 or more as
of June 30, 2000:
MATURITIES OF AND AMOUNTS OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS
$100,000 OR MORE
(in thousands)
Certificates of Deposit Other Time Deposits
$100,000 or More $100,000 or More Total
----------------------- -------------------- -------------
Three months or less....................... $ 125,878 $ 21,482 $ 147,360
Over 3 through 6 months.................... 91,255 336 91,591
Over 6 through 12 months................... 140,511 4,151 144,662
Over 12 months............................. 67,839 - 67,839
---------------- ---------- -------------
Total .................................. $ 425,483 $ 25,969 $ 451,452
================ ========== =============
STOCKHOLDERS' EQUITY
The Company's stockholders' equity at June 30, 2000 was $126.6 million compared
to $113.3 million at December 31, 1999. During this period stockholders' equity
increased by $13.3 million primarily due to the retention of net income and the
recovery in market value of the securities available for sale.
22
24
INTEREST RATE SENSITIVITY
The following table presents the projected maturities or interest rate
adjustments of the Company's earning assets and interest-bearing funding sources
based upon the contractual maturities or adjustment dates at June 30, 2000. The
interest-earning assets and interest-bearing liabilities of the Company and the
related interest rate sensitivity gap given in the following table may not be
reflective of positions in subsequent periods.
INTEREST RATE SENSITIVITY REPORT
(Dollars in thousands)
----------------------------------------------------------------------------------------
0 to 30 31 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Days Years Years Total
---------- ---------- --------- ---------- --------- ---------- -----------
Earning Assets:
Loans...................... $ 563,390 $ 180,447 $ 108,094 $ 79,613 $ 167,544 $ 18,608 $ 1,117,696
Federal funds sold.......... 39,933 39,933
Investment securities....... 139,458 72,282 27,593 25,176 11,966 86,125 362,600
Interest earning deposits
with other banks......... 30,064 22,377 16,333 38,765 4,000 111,539
---------- ---------- --------- --------- --------- ---------- -----------
Total ....................... 772,845 275,106 152,020 143,554 183,510 104,733 1,631,768
---------- ---------- --------- --------- --------- ---------- -----------
Funding Sources:
Savings and transaction
deposits................. 30,023 75,764 36,750 142,537
Certificates of deposits of
$100K or more............ 46,349 79,529 91,255 140,511 67,839 425,483
Certificates of deposits
under $100K.............. 42,706 137,314 216,536 220,732 123,611 38 740,937
Other time deposits......... 18,480 3,002 336 4,151 25,969
Funds overnight............. 101,085 101,085
Trust preferred securities.. 12,650 12,650
---------- ---------- --------- --------- --------- ---------- -----------
Total ....................... $ 238,643 $ 295,609 $ 344,877 $ 365,394 $ 191,450 $ 12,688 $ 1,448,661
========== ========== ========= ========= ========= ========== ===========
Interest sensitivity gap....... $ 534,202 $ (20,503) $(192,857) $(221,840) $ (7,940) $ 92,045 $ 183,107
========== ========== ========= ========= ========= ========== ===========
Cumulative gap................. $ 534,202 $ 513,699 $ 320,842 $ 99,002 $ 91,062 $ 183,107
========== ========== ========= ========= ========= ==========
Cumulative gap as a percentage
of total earning assets..... 32.74% 31.48% 19.66% 6.07% 5.58% 11.22%
===== ===== ===== ==== ==== =====
23
25
LIQUIDITY
Cash and cash equivalents decreased by $22.5 million from December 31, 1999 to
June 30, 2000. During the first six months of 2000, net cash provided by
operating activities was $31.2 million, net cash used in investing activities
was $23.8 million and net cash used in financing activities was $29.9 million.
For further information on cash flows, see the Consolidated Statement of Cash
Flows.
The Company's principal sources of liquidity and funding are its diverse deposit
base and the sale of bankers' acceptances as well as loan participations. The
level and maturity of deposits necessary to support the Company's lending and
investment activities is determined through monitoring loan demand and through
its asset/liability management process. Considerations in managing the Company's
liquidity position include, but are not limited to, scheduled cash flows from
existing assets, contingencies and liabilities, as well as projected liquidity
needs arising from anticipated extensions of credit. Furthermore the liquidity
position is monitored daily by management to maintain a level of liquidity
conducive to efficient operations and is continuously evaluated as part of the
asset/liability management process.
The majority of the Company's deposits are short-term and closely match the
short-term nature of the Company's assets. See "Interest Rate Sensitivity
Report." At June 30, 2000 interest-earning assets maturing or repricing within
six months were $1.200 billion, representing 73.5 percent of total earning
assets. Earning assets maturing or repricing within one year were $1.344 billion
or 82.3 percent of total earning assets. The interest bearing liabilities
maturing within six months were $879.1 million or 60.7 percent of total interest
bearing liabilities and maturing within one year were $1.244 billion or 85.9
percent of the total at June 30, 2000.
The short-term nature of the loan portfolio and the fact that a portion of the
loan portfolio consists of bankers' acceptances provides additional liquidity to
the Company. Liquid assets at June 30, 2000 were $404.6 million, 23.5 percent of
total assets, and consisted of cash and cash equivalents, interest earning
deposits in other banks and available for sale investment securities maturing
within one year or less that are unpledged. At June 30, 2000 the Company had
been advised of $34 million in available interbank funding.
CAPITAL RESOURCES
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
See Note 5 to the Company's interim consolidated financial statements for
regulatory developments subsequent to June 30, 2000
24
26
COMPANY CAPITAL RATIOS
(Dollars in thousands)
June 30, 2000 December 31, 1999
------------------------- --------------------------
Amount Ratio Amount Ratio
----------- ----- ------------ -----
Tier 1 risk-weighted
Capital:
Actual............................................ $ 130,595 11.0% $ 119,157 10.3%
Minimum........................................... 47,185 4.0% 46,286 4.0%
Total risk-weighted
Capital:
Actual............................................ 145,818 12.4% 134,111 11.6%
Minimum........................................... 94,369 8.0% 92,571 8.0%
Leverage:
Actual............................................ 130,595 7.6% 119,157 7.1%
Minimum........................................... 51,324 3.0% 50,106 3.0%
BANK CAPITAL RATIOS
(Dollars in thousands)
June 30, 2000 December 31, 1999
-------------------------- ---------------------------
Amount Ratio Amount Ratio
----------- ----- ------------ -----
Tier 1 risk-weighted capital:
Actual............................................ $ 121,678 10.3% $ 114,011 9.9%
Minimum to be well capitalized.................... 70,644 6.0% 69,289 6.0%
Minimum to be adequately capitalized.............. 47,096 4.0% 46,192 4.0%
Total risk-weighted capital:
Actual............................................ 136,873 11.6% 128,936 11.2%
Minimum to be well capitalized.................... 117,739 10.0% 115,481 10.0%
Minimum to be adequately capitalized.............. 94,192 8.0% 92,385 8.0%
Leverage:
Actual............................................ 121,678 7.2% 114,011 6.7%
Minimum to be well capitalized.................... 85,146 5.0% 84,571 4.0%
Minimum to be adequately capitalized.............. 68,117 4.0% 67,657 4.0%
25
27
MARKET RISK MANAGEMENT
In the normal course of conducting business activities, the Company is exposed
to market risk which includes both price and liquidity risk. The Company's price
risk arises from fluctuations in interest rates, and foreign exchange rates that
may result in changes in values of financial instruments. The Company does not
have material direct market risk related to commodity and equity prices.
Liquidity risk arises from the possibility that the Company may not be able to
satisfy current and future financial commitments or that the Company may not be
able to liquidate financial instruments at market prices. Risk management
policies and procedures have been established and are utilized to manage the
Company's exposure to market risk. The strategy of the Company is to operate at
an acceptable risk environment while maximizing its earnings.
Market risk is managed by the Asset Liability Committee which formulates and
monitors the performance of the Company based on established levels of market
risk as dictated by policy. In setting the tolerance levels of market risk, the
Committee considers the impact on both earnings and capital, based on potential
changes in the outlook in market rates, global and regional economies,
liquidity, business strategies and other factors.
The Company's asset and liability management process is utilized to manage
interest rate risk through the structuring of balance sheet and off-balance
sheet portfolios. It is the strategy of the Company to maintain as neutral an
interest rate risk position as possible. By utilizing this strategy the Company
"locks in" a spread between interest earning assets and interest-bearing
liabilities. Given the matching strategy of the Company and the fact that it
does not maintain significant medium and/or long-term exposure positions, the
Company's interest rate risk will be measured and quantified through an interest
rate sensitivity report. An excess of assets or liabilities over these matched
items results in a gap or mismatch. A positive gap denotes asset sensitivity and
normally means that an increase in interest rates would have a positive effect
on net interest income. On the other hand a negative gap denotes liability
sensitivity and normally means that a decline in interest rates would have a
positive effect in net interest income. However, because different types of
assets and liabilities with similar maturities may reprice at different rates or
may otherwise react differently to changes in overall market rates or
conditions, changes in prevailing interest rates may not necessarily have such
effects on net interest income.
Interest Rate Sensitivity Report as of June 30, 2000 shows that interest earning
assets maturing or repricing within one year exceed interest bearing liabilities
by $99.0 million. The Company monitors that the assets and liabilities are
closely matched to minimize interest rate risk.
The level of imbalance between the repricing of rate sensitive assets and rate
sensitive liabilities will be measured through a series of ratios. Substantially
all of the Company's assets and liabilities are denominated in dollars,
therefore the Company has no material foreign exchange risk. In addition, the
Company has no trading account securities, therefore it is not exposed to market
risk resulting from trading activities.
On a daily basis the Bank's Controller and the Bank's Treasurer are responsible
for measuring and managing market risk.
RESULTS OF OPERATIONS-SIX MONTHS
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned on loans
and investments and interest paid on deposits and other sources of funds. It
constitutes the Company's principal source of income. Net interest income
increased to $32.9 million for the six months ended June 30, 2000 from $29.9
million for the same period in 1999, a 10.0 percent increase. The increase was
due largely to an increase in the net interest margin as well as an increase in
average earning assets. Average earning assets increased to $1.626 billion for
the six months ended June 30, 2000 from $1.517 billion for the same period in
1999, an 7.2 percent increase. Average loans and acceptances discounted
increased to $1.182 billion for the six months ended June 30, 2000 from $1.165
billion for the same period in 1999, a 1.5 percent increase, despite the
reclassification of bearer debt securities underwritten as loans and considered
in the loan portfolio during 1999. Management changed its original intent to
hold these securities to maturity and approximately $166 million in foreign debt
securities were reclassified to investments available for sale. The overall
increase in loans was largely attributable to trade finance activities within
the Region. Net interest margin increased to 4.07 percent for the six months
ended June 30, 2000 from 3.98 percent for the same period in 1999, a 9 basis
point increase. This increase is due primarily to the increases in the prime
rate during the last six months which has in turn increased the base for pricing
commercial loans, offset by higher rates on deposits.
Interest income increased to $75.1 million for the six months ended June 30,
2000 from $65.7 million for the same period in 1999, a 14.4 percent increase,
reflecting the increase in commercial loan balances and the increase in
prevailing interest rates. Interest expense increased to $42.3 million for the
six months ended June 30, 2000 from $35.8 million for the same period in 1999,
an 18.2 percent increase. Average interest-bearing deposits increased to $1.440
billion for the six months ended June 30, 2000 from $1.329 billion for the same
period in 1999, an 8.4 percent increase. The growth in deposits was primarily a
result of the Company seeking additional deposits to fund asset growth.
26
28
YIELDS EARNED AND RATE PAID
For the Six Months Ended
-----------------------------------------------------------------------------
June 30, 2000 June 30, 1999
-------------------------------------- ----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ---------- --------- ------------ ----------- -------
TOTAL EARNING ASSETS
LOANS:
Commercial loans...................... $ 1,058,511 $ 50,519 9.60% $ 1,038,509 $ 47,237 9.17%
Acceptances Discounted................ 114,067 5,455 9.46% 113,276 5,031 8.83%
Overdraft............................. 7,475 878 23.23% 9,271 985 21.13%
Mortgage loans........................ 2,108 85 7.98% 3,711 116 6.22%
------------- ---------- --------- ------------ ----------- -------
TOTAL LOANS.............................. 1,182,161 56,937 9.69% 1,164,767 53,369 9.24%
------------- ---------- --------- ------------ ----------- -------
Time Deposit with Banks.................. 153,161 7,278 9.40% 158,758 6,995 8.76%
Investments.............................. 239,577 9,466 7.20% 159,007 4,499 5.63%
Federal funds sold....................... 51,137 1,518 5.87% 34,764 849 4.86%
------------- ---------- --------- ------------ ----------- -------
Total Investments and Time Deposit
with Banks.......................... 443,875 18,262 8.14% 352,529 12,343 6.96%
------------- ---------- --------- ------------ -------
Total Interest Earning assets............ 1,626,036 75,199 9.30% 1,517,296 65,712 8.73%
---------- -------- ----------- -------
Total non interest earning assets........ 72,614 87,984
------------- ------------
TOTAL ASSETS............................. $ 1,698,650 $ 1,604,280
============= ============
Interest Bearing Liabilities
DEPOSITS:
NOW and savings accounts.............. $ 21,916 265 2.39% $ 22,756 271 2.37%
Money Market.......................... 44,817 1,310 5.78% 44,762 1,028 4.57%
Presidential Money Market............. 68,578 1,921 5.54% 33,119 789 4.74%
Certificate of Deposits (including IRA) 1,217,235 35,794 5.82% 1,121,146 30,444 5.40%
Time Deposits with Banks (IBF)........ 87,530 2,365 5.34% 107,695 2,482 4.58%
------------- ---------- -------- ------------ ----------- ------
TOTAL DEPOSITS........................... 1,440,076 41,655 5.72% 1,329,478 35,014 5.24%
Trust preferred securities............... 12,650 617 9.75% 12,522 615 9.77%
Federal Funds Purchased.................. 27 1 6.48% 2,734 103 7.49%
Other Borrowings......................... -- -- --% 1,614 41 5.05%
------------- ---------- -------- ------------ ----------- ------
Total interest bearing liabilities....... 1,452,753 42,273 5.76% 1,346,348 35,773 5.28%
------------- ---------- -------- ------------ ----------- ------
Non-interest bearing liabilities
Demand Deposits....................... 78,032 73,940
Other Liabilities..................... 56,076 71,832
------------- ------------
Total non interest bearing liabilities... 134,108 145,772
Stockholders' equity..................... 111,789 112,160
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $ 1,698,650 $ 1,604,280
============= ============
NET INTEREST INCOME/NET INTEREST
SPREAD................................ $ 32,926 3.39% $ 29,939 3.33%
========== ======== =========== ======
MARGIN:
INTEREST INCOME/INTEREST EARNING ASSETS.. 9.30% 8.73%
INTEREST EXPENSE/INTEREST EARNING ASSETS. 5.23% 4.75%
--------- ------
NET INTEREST MARGIN................. 4.07% 3.98%
======== ======
27
29
PROVISIONS FOR CREDIT LOSSES AND TRANSFER RISK
The Company's provision for credit losses decreased to $750 thousand for the six
months ended June 30, 2000 from $2.6 million for the same period in 1999. The
level of the provision for the period decreased due to the following factors: a)
decrease in loans from December 31, 1999 to June 30, 2000, b) the relatively low
level of charge-offs to average loans during the period, c) the application of
the Bank's methodologies utilized in estimating the adequacy of the allowance
for loan losses did not reveal a need to increase the allowance and d) a
reallocation of specific reserves due to the payoff of certain criticized
foreign loans supported the increase in nonperforming loans without the need for
additional reserves. Net loan charge-offs during the first six months of 2000
amounted to $1.93 million compared to $2.74 million for the same period in 1999.
The allowance for credit losses increased from $12.7 million at June 30, 1999 to
$20.2 million at June 30, 2000.
The Company's provision for ATRR decreased from $31.2 million for the first six
months of 1999 to $3.6 million for the first six months of 2000. The decrease
was the result of a lower amount of Ecuadorian exposure becoming initially
subject to ATRR requirements in the 2000 period compared to 1999. See "Allocated
Transfer Risk Reserves" on page 17 for more discussion of ATRR.
NON-INTEREST INCOME
Non-interest income increased to $8.0 million for the six months ended June 30,
2000 compared to $7.2 million for the same period in 1999. The Company realized
gains on sale of assets of $2.0 million related to the sale of foreign debt
securities previously written down. This increase was offset by decreases in
structuring and syndication fees and trade finance fees and commissions.
The following table sets forth details regarding the components of non-interest
income for the periods indicated.
NON-INTEREST INCOME
(Dollars in thousands)
For the Six Months Ended June 30,
----------------------------------------------
1999 to 2000
2000 Percent Change 1999
----------- --------------- ------------
Trade finance fees and commissions.................................... $ 4,284 -16.9% $ 5,155
Structuring and syndication fees...................................... 2 -99.8% 840
Customer service fees................................................. 849 10.1% 771
Gain on sale of assets................................................ 2,691 1157.5% 214
Other................................................................. 181 3.4% 175
----------- ----------- ------------
Total non-interest income............................................. $ 8,007 11.9% $ 7,155
=========== =========== ============
OPERATING EXPENSES
Operating expenses increased to $17.1 million for the six months ended June 30,
2000 from $14.6 million for the same period in 1999, a 17.1 percent increase.
The majority of this increase was in other losses and charge-offs which
increased to $2.6 million from $1.1 million largely as a result of a write off
of a receivable. This miscellaneous receivable represented $1.7 million due for
structuring and syndication services provided by the Bank, of which the customer
had made a partial payment. A dispute arose between the Bank and the customer
regarding the balance owed, which was settled and resulted in a write-off of $1
million and payment in full of the balance. The Company's efficiency ratio was
41.9 percent for the six month period ended June 30, 2000 compared to 38.5
percent for the same period in 1999.
The following table sets forth details regarding the components of operating
expenses for the periods indicated.
28
30
OPERATING EXPENSES
(Dollars in thousands)
For the Six Months Ended June 30,
----------------------------------------------
1999 to 2000
2000 Percent Change 1999
----------- --------------- ------------
Employee compensation and benefits.................................... $ 6,619 1.7% $ 6,511
Occupancy and equipment............................................... 2,452 22.8% 1,997
Legal Expenses........................................................ 1,071 -12.3% 1,221
Other losses & charge-offs............................................ 2,581 136.1% 1,093
Other operating expenses.............................................. 4,412 17.2% 3,763
----------- ----------- ------------
Total operating expenses.............................................. $ 17,135 17.5% $ 14,585
=========== =========== ============
QUARTER OVERVIEW
Net income for the second quarter of 2000 was $7.1 million, compared to a loss
of ($7.0) million in the second quarter of 1999. The 1999 quarter included a
provision for ATRR of $21.3 million which was a primary factor in the loss in
1999. Net interest income increased slightly by 2 percent and non-interest
income increased by 14 percent to $3.9 million for the three months ended June
30, 2000, compared to $3.5 million for the same period in 1999. In addition,
operating expenses increased to $8.4 million for the quarter ended June 30, 2000
from $7.4 million for the same period in 1999. Below is a detailed discussion of
the specific changes in the results of operations.
RESULTS OF OPERATIONS - SECOND QUARTER
Net interest income increased to $16.2 million for the quarter ended June 30,
2000 from $15.9 million for the same period in 1999, a 1.7 percent increase.
Higher average assets and yields on assets were substantially offset by higher
funding costs. Average earning assets increased 12.1 percent to $1.642 billion,
from $1.483 billion for the same period in 1999. Average loans decreased to
$1.121 billion after excluding $136 million in loans reclassified to investments
available for sale discussed earlier. In addition, average investments increased
by approximately $202 million to $324.2 million after considering the
reclassification of investments recorded at December 31, 1999. Net interest
margin decreased by 35 basis points to 3.96 percent for the quarter ended June
30, 2000, from 4.31 percent for the same period in 1999.
Interest income increased to $38.0 million for the quarter ended June 30, 2000
from $33.1 for the same period in 1999 a 14.7 percent increase reflecting the
increase in average investments. In addition, the yield earned on loans
increased by 44 basis points to 9.80 percent at June 30, 2000 from 9.36 percent
at the same period in 1999. Interest expense increased to $21.8 million, an
increase of 26.7 percent when compared to the same period in 1999. Average
interest bearing liabilities increased by 12.0 percent to $1.465 billion when
compared to the same period in 1999. The increase in average interest bearing
deposits was primarily in certificate of deposits which increased by 12.5
percent to $1.218 billion at June 30, 2000 when compared to the same period in
1999. In addition, the rate paid on interest bearing liabilities increased by 63
basis points to 5.89 percent for the three months ended June 30, 2000 when
compared to the same period in 1999.
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31
YIELDS EARNED AND RATE PAID
For the Quarter Ended
----------------------------------------------------------------------------
June 30, 2000 June 30, 1999
----------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
------------ --------- ------- ------------ ---------- ------
TOTAL EARNING ASSETS LOANS:
Commercial loans...................... $ 996,724 $ 24,065 9.71% $ 1,048,923 $ 24,526 9.38%
Acceptances Discounted................ 113,569 2,733 9.52% 109,550 2,389 8.72%
Overdraft............................. 9,191 491 21.13% 6,505 289 17.77%
Mortgage loans........................ 2,089 42 7.95% 2,322 45 7.75%
------------ --------- ------- ------------ ---------- ------
TOTAL LOANS.............................. 1,121,573 27,331 9.80% 1,167,300 27,249 9.36%
------------ --------- ------- ------------ ---------- ------
Time Deposit with Banks.................. 144,214 3,437 9.43% 162,295 3,754 9.25%
Investments.............................. 324,218 6,414 7.83% 122,672 1,744 5.69%
Federal funds sold....................... 52,386 815 6.15% 31,084 383 4.93%
------------ --------- ------- ------------ ---------- ------
Total Investments and Time Deposit
with Banks....................... 520,818 10,666 8.10% 316,051 5,881 7.44%
Total Interest Earning assets............ 1,642,391 37,997 9.30% 1,483,351 33,130 8.96%
--------- ------- ---------- ------
Total non interest earning assets........ 69,992 67,054
------------ ------------
TOTAL ASSETS............................. $ 1,712,383 $ 1,550,405
============ ============
INTEREST BEARING LIABILITIES
DEPOSITS:
NOW and savings accounts.............. $ 21,663 133 2.43% $ 23,847 162 2.72%
Money Market.......................... 45,578 680 5.90% 43,686 499 4.57%
Presidential Money Market............. 71,577 1,015 5.61% 40,482 484 4.78%
Certificate of Deposits (including IRA) 1,218,136 18,301 5.94% 1,082,645 14,556 5.38%
Time Deposits with Banks (IBF)
and Other........................... 95,344 1,361 5.65% 102,145 1,145 4.48%
------------ --------- ------- ------------ ---------- ------
TOTAL DEPOSITS........................... 1,452,298 21,490 5.85% 1,292,805 16,846 5.21%
Trust preferred securities............... 12,650 308 9.74% 12,650 313 9.90%
Federal Funds Purchased.................. -- -- --% -- -- 0.00%
Other Borrowings......................... -- -- --% 3,101 39 5.03%
------------ --------- ------- ------------ ---------- ------
Total interest bearing liabilities....... 1,464,948 21,798 5.89% 1,308,556 17,198 5.26%
------------ --------- ------- ------------ ---------- ------
Non interest bearing liabilities
Demand Deposits....................... 74,893 72,389
Other Liabilities..................... 59,691 57,126
------------ ------------
Total non interest bearing liabilities... 134,584 129,515
Stockholders' equity..................... 112,851 112,334
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $ 1,712,383 $ 1,550,405
============ ============
NET INTEREST INCOME/NET INTEREST
SPREAD................................ $ 16,199 3.27% $ 15,932 3.68%
========= ======= ========== ======
MARGIN
INTEREST INCOME/INTEREST EARNING ASSETS.. 9.30% 8.96%
INTEREST EXPENSE/INTEREST EARNING ASSETS. 5.34% 4.65%
-------- -------
NET INTEREST MARGIN................. 3.96% 4.31%
======= ======
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32
NON-INTEREST INCOME
Non-interest income increased by 14 percent to $3.9 million for the three months
ended June 30, 2000 compared to $3.4 million for the same period in 1999. The
Company realized a gain on the sale of foreign debt securities of $1.2 million
during the three month period which offset decreases in trade finance fees and
structuring and syndication fees.
The following table sets forth details regarding the components of non-interest
income for the periods indicated.
NON-INTEREST INCOME
(Dollars in thousands)
For the Three Months Ended June 30,
----------------------------------------------
2000 to 1999
2000 Percent Change 1999
----------- -------------- ------------
Trade finance fees and commissions.................................... $ 2,067 -14.8% $ 2,425
Structuring and syndication fees...................................... 2 -99.7% 594
Customer service fees................................................. 449 26.1% 356
Gain on sale of assets................................................ 1,343 4874.1% 27
Other................................................................. 84 50.0% 56
----------- ----------- ------------
Total non-interest income............................................. $ 3,945 14.1% $ 3,458
=========== =========== ============
OPERATING EXPENSES
Operating expenses increased to $8.4 million for the quarter ended June 30, 2000
from $7.4 million for the same period in 1999 an increase of 13.7 percent. The
increase was primarily in employee compensation and benefits attributable to an
increase in the domestic commercial lending department that was added in the
second quarter to expand the Company's domestic loan activities.
In May 2000, a judge granted monetary bankruptcy preference damages against the
Company of approximately $2.4 million. This judgment arose from an action filed
against the Company in January 1998 objecting to the Company's proof of claim in
a Chapter 11 bankruptcy proceeding involving a former borrower, and seeking
damages against the Company in excess of $34 million for alleged involvement
with former officers and directors of the former borrower. The Company believes
the claims are without merit and is vigorously defending the action. Both the
Company and the bankruptcy trustee have appealed the judge's decision. The
Company estimates the loss associated with this matter could range from $0,
should it prevail in its appeal, to the full amount of the judgment of $2.4
million. Based on counsel's assessment of this matter, the best estimate of loss
as of June 30, 2000 was $600,000, which has been included in operating expenses
in the consolidated financial statements as of and for the three months ended
June 30, 2000. See Note 5 to the consolidated financial statements for an update
on the status of this matter.
OPERATING EXPENSES
(Dollars in thousands)
For the Three Months Ended June 30,
----------------------------------------------
2000 to 1999
2000 Percent Change 1999
----------- -------------- ------------
Employee compensation and benefits.................................... $ 3,656 15.4% $ 3,167
Occupancy and equipment............................................... 1,154 11.3% 1,037
Other operating expenses.............................................. 3,639 12.8% 3,227
----------- ----------- ------------
Total operating expenses.............................................. $ 8,449 13.7% $ 7,431
=========== =========== ============
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33
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 13, 1998 Development Specialists, Inc., the Liquidating Trustee of
the Model Imperial Liquidating Trust established under the Plan of
Reorganization in the Model Imperial, Inc. Chapter 11 Bankruptcy proceeding,
filed an action against Hamilton Bank in the United States Bankruptcy Court for
the Southern District of Florida objecting to Hamilton Bank's proof of claim in
the Chapter 11 proceeding and affirmatively seeking damages against Hamilton
Bank in excess of $34 million for alleged involvement with former officers and
directors of Model Imperial, Inc. in a scheme to defraud Model Imperial, Inc.
and its bank lenders. The action is one of several similar actions that were
filed by the Trustee against other defendants that were involved with Model
Imperial seeking essentially the same amount of damages as in the action against
Hamilton Bank. The Company believes the claims are without merit and is
vigorously defending the action. A trial of various bankruptcy preference claims
in excess of $12,000,000 was held in November 1999. The Judge rendered a
decision on May 16, 2000 holding Hamilton Bank's proof of claim was subordinate
to DSI's and granting monetary bankruptcy preference damages against Hamilton
Bank in the amount of $2,448,148. The Company estimates the loss associated with
this matter could range from $0, should it prevail on appeal, to the full amount
of the judgment. Based on counsel's assessment of this matter, the best estimate
of loss as of June 30, 2000 was $600,000, which has been accrued in the
consolidated financial statements.
Both Hamilton Bank and DSI appealed the judge's decision. In December 2000 an
agreement was reached in which Hamilton Bank made a net payment of approximately
$3.9 million to the Liquidating Trust to settle the case. In his March 28, 2001
Order approving the settlement, the Judge specifically found that the Court had
not been presented with any evidence that Hamilton Bank had actual knowledge of
any transactions lacking in economic substance. The Judge also found that
Hamilton Bank was unaware of Model Imperial's deteriorating financial condition
and that Hamilton Bank was instead a victim of Model Imperial's inappropriate
transactions. The full amount of the settlement was included in operating
results during the year ended December 31, 2000.
32
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 30, 2001 Hamilton Bancorp Inc.
/s/ J. Carlos Bernace
-----------------------------------------
J. Carlos Bernace,
Executive Vice President
/s/ Lucious T. Harris
-----------------------------------------
Lucious T. Harris
Executive Vice President and Chief
Financial Officer
33
35
Exhibit 1 of the Registrant's Form 10-Q/A for the quarterly period ended June
30, 2000 is hereby amended to read as follows:
EXHIBIT 1
HAMILTON BANCORP INC. AND SUBSIDIARIES
CALCULATION OF EARNINGS (LOSS) PER SHARE
(Dollars in thousands, except per share data)
As Restated,
see Note 4
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- --------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- ----------------
Basic
Weighted average number of common shares
outstanding.................................. 10,081,147 10,065,908 10,081,147 10,061,037
Net income (loss)................................ $ 7,120 $ (6,968) $ 12,536 $ (7,122)
Basic earnings (loss) per share.................. $ 0.71 $ (0.69) $ 1.24 $ (0.71)
Diluted:
Weighted average number of common shares
outstanding................................. 10,081,147 10,065,908 10,081,147 10,061,037
Potential common shares outstanding - options.... 149,168 208,619 144,691 215,316
--------------- -------------- -------------- ----------------
Total common and potential common shares
outstanding.................................. 10,230,315 10,274,527 10,225,838 10,276,353
Net income (loss) ............................... $ 7,120 $ (6,968) $ 12,536 $ (7,122)
Diluted earnings (loss) per share................ $ 0.70 $ (0.69) $ 1.23 $ (0.71)
34